UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING SEPTEMBER 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0 - 1325
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MULTIBAND CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
41 - 1255001
(IRS Employer Identification No.)
9449 SCIENCE CENTER DRIVE, NEW HOPE, MINNESOTA 55428
(Address of principal executive offices)
TELEPHONE (763) 504-3000 FAX (763) 504-3060
www.multibandusa.com Internet
(Registrant's telephone number, facsimile number, and Internet address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes |_| No |X|
On November 12, 2004 there were 25,773,767 shares outstanding of the
registrant's common stock, par value $.01 per share, and 369,531 outstanding
shares of the registrant's convertible preferred stock.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $ 9,068,758 $ 6,283,365 $ 22,734,594 $ 17,843,508
COSTS AND EXPENSES
Cost of products and services 5,796,027 4,493,829 15,580,482 12,718,951
Selling, general and administrative 3,126,417 2,029,242 7,930,244 6,097,989
Depreciation and amortization 1,119,566 379,985 2,557,788 1,049,976
Impairment of goodwill 527,879 0 527,879 0
------------ ------------ ------------ ------------
Total Costs and Expenses $ 10,569,889 $ 6,903,056 $ 26,596,393 $ 19,866,916
LOSS FROM OPERATIONS (1,501,131) (619,691) (3,861,799) (2,023,408)
OTHER EXPENSE
Interest expense (347,647) (202,958) (949,129) (648,368)
Other Income (expense) (2,815) (6,513) (9,003) (56,777)
------------ ------------ ------------ ------------
Total Other Expense (350,462) (209,471) (958,132) (705,145)
MINORITY INTEREST IN JOINT VENTURE 0 (3,460) 0 (4,853)
LOSS BEFORE INCOME TAXES (1,851,593) (832,622) (4,819,931) (2,733,406)
PROVISION FOR INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS (1,851,593) (832,622) (4,819,931) (2,733,406)
Preferred Stock Dividends (83,714) (43,301) (541,640) (135,353)
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,935,307) $ (875,923) $ (5,361,571) $ (2,868,759)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (.07) $ (.05) $ (.21) $ (.18)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 25,480,007 16,981,266 22,494,250 15,168,069
See notes to condensed consolidated financial statements
2
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
September 30, December 31,
2004 2003
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 465,885 $ 2,945,960
Certificate of deposit ......................................................... 250,000 250,000
Accounts receivable, net ....................................................... 3,752,302 1,658,114
Inventories, net ............................................................... 1,363,698 1,973,817
Other Current Assets ........................................................... 78,563 96,550
------------ ------------
TOTAL CURRENT ASSETS ........................................................ 5,910,448 6,924,441
------------ ------------
PROPERTY AND EQUIPMENT, NET ....................................................... 4,269,736 3,589,704
------------ ------------
OTHER ASSETS
Goodwill ....................................................................... 2,233,366 2,748,879
Intangible assets, net ......................................................... 17,270,536 503,625
Other .......................................................................... 330,032 136,236
------------ ------------
TOTAL OTHER ASSETS ......................................................... 19,833,934 3,388,740
------------ ------------
TOTAL ASSETS ...................................................................... $ 30,014,118 $ 13,902,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank ........................................ $ 32,969 $ 147,398
Wholesale line of credit ....................................................... 1,069,359 976,314
Short term debt ................................................................ 5,849,906 0
Current portion of long term debt .............................................. 637,254 998,813
Current portion of note payable, stockholder ................................... 94,794 81,554
Current portion of capital lease obligations ................................... 102,362 54,939
Accounts payable ............................................................... 2,575,675 1,771,699
Accrued liabilities ............................................................ 3,700,035 1,459,705
Deferred service obligations and revenue ....................................... 413,360 315,227
------------ ------------
TOTAL CURRENT LIABILITIES ................................................... 14,475,714 5,805,649
LONG TERM DEBT, NET ............................................................... 2,519,530 2,087,156
OTHER LONG TERM DEBT .............................................................. 222,700 0
------------ ------------
NOTE PAYABLE, STOCKHOLDER, NET OF CURRENT PORTION ................................. 0 32,837
------------ ------------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ................................. 636,499 142,898
------------ ------------
TOTAL LIABILITIES ................................................................. 17,854,443 8,068,540
------------ ------------
MINORITY INTEREST IN JOINT VENTURE ................................................ 0 26,634
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,931 shares issued and outstanding, $293,276 liquidation
preference) .................................................................. 419,752 419,752
10% Class B (8,700 shares issued and outstanding, $91,350 liquidation preference) 62,000 62,000
10% Class C (125,400 shares issued and outstanding, $1,254,000 liquidation
preference) .................................................................. 1,611,105 1,611,105
15% Class E (0 and 77,650 shares issued and outstanding,) ....................... 0 438,964
10% Class F (200,000 and 0 shares issued and outstanding, $2,000,000 liquidation
preference) .................................................................. 2,000,000 0
10% Class G (7,500 and 0 shares issued and outstanding, $75,000 liquidation
preference) .................................................................. 70,672 0
Common stock, no par value (25,621,084 and 19,036,805 shares issued;
25,617,745 and 19,819,786 shares outstanding) ................................ 16,678,538 7,726,505
Stock subscriptions receivable .................................................. (368,243) (418,085)
Options and warrants .......................................................... 31,379,338 30,514,872
Unamortized compensation ...................................................... (1,724) (217,210)
Accumulated deficit ........................................................... (39,691,763) (34,330,192)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ........................................................ 12,159,675 5,807,711
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 30,014,118 $ 13,902,885
============ ============
See notes to condensed consolidated financial statements.
3
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 (Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30, (UNAUDITED)
--------------------------
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss ....................................................................... $(4,819,931) $(2,733,406)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization ............................................... 2,344,853 709,404
Amortization of deferred compensation ....................................... 212,935 340,572
Amortization of original issue discount ..................................... 541,873 285,345
Common stock issued for services ............................................ 291,220 321,920
Impairment of goodwill ...................................................... 527,879 0
Loss on sales of property and equipment ..................................... 26,217 76,269
Reduction of note payable in connection with reimbursement of seller expenses (273,900) 0
Interest receivable on stock subscription receivable ........................ 0 13,452
Minority interest in joint venture .......................................... 0 4,853
Changes in operating assets and liabilities:
Accounts receivable, net .................................................. (2,134,902) (329,189)
Inventories, net .......................................................... 610,119 (411,092)
Other current assets ...................................................... 17,987 (6,026)
Other assets .............................................................. (87,135) (21,531)
Wholesale line of credit .................................................. 93,045 33,384
Accounts payable and accrued liabilities .................................. 620,817 (388,208)
Deferred service obligations and revenue .................................. 98,133 26,246
----------- -----------
Net cash flows from operating activities ............................... (1,930,790) (2,078,007)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment ............................................ (483,810) (356,291)
Purchase of Satellite Broadcasting Corporation ................................. (187,424) 0
Purchase of Minnesota Digital Universe, Inc. ................................... (1,100,000) 0
Purchase of Rainbow Satellite Group, LLC ....................................... (1,000,000) 0
Purchase of 21st Century Satellite Communications Inc .......................... (250,000) 0
Payment for investment in joint venture ........................................ 0 (64,878)
Proceeds from sale of property and equipment ................................... 649 6,145
Collections on notes receivable ................................................ 3,172 5,806
----------- -----------
Net cash flows from investing activities ............................... (3,017,413) (409,218)
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FINANCING ACTIVITIES
Checks issued in excess of cash in bank ........................................ (74,068) 0
Payments on long term debt ..................................................... (1,215,788) (183,936)
Payments on capital lease obligations .......................................... (63,066) (69,252)
Proceeds from issuance of long term debt ....................................... 750,021 133,726
Payments on note payable to stockholder ........................................ (19,598) 0
Proceeds from issuance of stock and warrants ................................... 2,888,836 3,654,388
Redemption of common stock ..................................................... (62,975) 0
Exercise of warrants ........................................................... 390,279 312,030
Redemption of preferred stock .................................................. 0 (2,100)
Preferred stock dividends ...................................................... (125,513) (51,263)
----------- -----------
Net cash flows from financing activities ............................... (2,468,128) 3,793,593
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. (2,480,075) 1,306,368
CASH AND CASH EQUIVALENTS
Beginning of period ............................................................ 2,945,960 540,375
----------- -----------
End of period .................................................................. 465,885 $ 1,846,743
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount ......... 447,548 280,148
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of preferred stock for acquisition of assets .......................... 0 76,500
Issuance of common stock for acquisition of assets, MBUSA and URON ............. 274,800 0
Warrants issued with debt ...................................................... 0 208,447
Conversion of preferred stock and accrued dividends into common stock .......... 776,500 40,000
Current liabilities converted to stock ......................................... 136,581 248,623
Conversion of notes payable into common stock .................................. 510,908 642,000
Conversion of dividend into common stock ....................................... 78,591 84,090
Reduction of stock subscription receivable ..................................... 0 26,602
Issuance of common stock for acquisition of 21st Century ....................... 364,583 0
Issuance of preferred stock and notes payable for acquisition of assets, Rainbow 6,519,999 0
Purchase of property and equipment as a reduction of accounts receivable ....... 40,714 0
Capitalized construction costs in accrued expenses ............................. 20,000 0
Issuance of common stock of $3,850,000 and notes payable of $2,750,000 for
acquisition of assets, MDU ................................................... 6,600,000 0
Stock subscription receivable for issuance of common stock ..................... 0 40,000
Capital lease assumed in acquisition of equipment from 21st Century ............ 416,666 0
See notes to condensed consolidated financial statements
4
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2004 and 2003
NOTE 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues and Cost Recognition
Multiband Corporation and subsidiaries (the Company) earns revenues from 6
sources: 1) Video and computer technology products which are sold but not
installed, 2) Voice, video and data communication products which are sold and
installed, 3) Service revenues related to communication products which are sold
and both installed and not installed, 4) Multiband user charges to multiple
dwelling units, 5) MB USA user charges to timeshares, 6) DirecTV fees.
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms. Product returns and customer discounts
are netted against revenues.
Customer contracts for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenues are recognized when the products are
delivered and installed, and the customer has accepted the terms and has the
ability to fulfill the terms.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. Service revenues are
expected to account for approximately 20% of total revenues for the year ending
December 31, 2004. Service revenues were less than 10% of total revenues for the
year ended December 31, 2003. The Company, if the customer elects, enters into
equipment maintenance agreements for products sold once the original
manufacturer's warranty has expired. Revenues from all equipment maintenance
agreements are recognized on a straight-line basis over the terms of each
contract. Costs for services are expensed as incurred.
MultiBand and MBUSA user charges are recognized as revenues in the period the
related services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Intangible Assets
The Company amortizes a domain name acquired during the year ended December 31,
2001 over its estimated useful life of five years using the straight-line
method. The Company amortizes access contracts and customer cable lists, on an
average, over their useful estimated lives which usually range from two to six
years. The Company is also amortizing the value of its DirecTV agent agreement
obtained via MDU over a 73 month period beginning April 2004. The Rainbow
Satellite amortization of cable lists is over a period of 73 months, beginning
June, 2004.
Amortization of intangible assets was $810,097 and $19,188 for the three months
ended September 30, 2004 and 2003, respectively. For the nine month period ended
September 30, 2004 and 2003, amortization of intangible assets was $1,489,242
and $36,652 respectively. Estimated amortization expense on intangible assets
for the quarter ending December 31, 2004 and years ending December 31, 2005,
2006, 2007 and 2008 is $1,554,749, $3,335,904, $3,086,818, $3,028,678, and
$3,013,672 respectively.
5
AMORTIZATION -INTANGIBLE ASSETS
SEPTEMBER 30, 2004 DECEMBER 31, 2003
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Intangible assets subject to amortization
Florida Cable 300,000 45,000 300,000 0
URON 453,930 170,225 0 0
Satellite Broadcasting 457,576 38,131 0 0
Minnesota Digital Universe 9,551,831 785,082 0 0
Rainbow Satellite 7,043,641 391,313 0 0
Multiband Domain Name 83,750 51,645 83,750 39,083
MDU Subscriber Rights 60,042 10,008 0 0
Access Contracts 60,000 28,333 60,000 13,334
21st Century 708,334 19,675 0 0
Debt Issuance Costs 130,333 39,489 115,500 3,208
---------- ---------- ---------- ----------
Total 18,849,437 1,578,901 559,250 55,625
========== ========== ========== ==========
Intangible assets not subject to amortization
---------- ---------- ---------- ----------
Goodwill 3,543,523 1,310,157 3,531,157 782,278
========== ========== ========== ==========
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was originally amortized using the
straight-line method over ten years. Due to changes in accounting standards, the
carrying value of goodwill is now reviewed at least annually to see if the facts
and circumstances suggest that it may be impaired. If the review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the assets acquired over the remaining amortization period, the
Company's carrying value of goodwill is reduced by the estimated shortfall of
cash flows. During the three months ended September 30, 2004, the Company
completed its review of goodwill and determined it was partially impaired. The
Company recorded impairment charges to goodwill of $527,879 related to the
Corporate Technologies acquisition during the three and nine months ended
September, 2004 and $0 during the three and nine months ended September 30,
2003.
Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant date
over the amount the employee must pay for the stock. The Company's general
policy is to grant stock options at fair value at the date of grant.
Pursuant to APB No. 25 and related interpretations, $15,448 and $100,191 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended September 30, 2004 and 2003,
respectively. For the nine months ended September 30, 2004 and 2003, $212,935
and $340,572 of compensation cost has been recognized. Had compensation cost
been recognized based on the fair values of options at the grant dates
consistent with the provisions of Statements of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation", the Company's net loss
and loss attributable to common stockholders and basic and diluted loss per
common share would have been increased to the pro forma amounts:
6
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Loss attributable to common stockholders $(1,935,307) $ (875,923) $(5,361,571) $(2,868,759)
Pro forma loss attributable to common shares $(1,965,795) $(1,013,109) $(5,887,093) $(3,582,520)
Basic and diluted net loss per share:
As reported $ (.08) $ (0.05) $ (.24) $ (0.19)
Pro forma loss attributable to common shares $ (.08) $ (0.06) $ (.26) $ (0.24)
Stock-based compensation:
As reported $ 15,448 $ 100,191 $ 212,935 $ 340,572
Proforma $ 30,488 $ 137,186 $ 525,522 $ 713,761
In determining the compensation cost of the options granted during the three
months ended September 30, 2004 and 2003, as specified by SFAS No. 123, the fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used in
these calculations are summarized as follows for September 30:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Risk-free interest rate 3.50% 3.62% 3.50% 3.41%
Expected life of options granted 10 years 10 years 10 years 10 years
Expected volatility range 184% 170% 184% 170%
Expected dividend yield 0% 0% 0% 0%
Net Loss per Share
Basic net loss per common share is computed by dividing the loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net loss per common share is computed by
dividing loss attributable to common stockholders by the sum of the weighted
average number of common shares outstanding plus all additional common stock
that would have been outstanding if potentially dilutive common shares related
to common share equivalents (stock options, stock warrants, convertible
preferred shares, and issued but not outstanding restricted stock) had been
issued. All options, warrants, convertible preferred shares, and issued but not
outstanding restricted stock during the three and nine months ended September
30, 2004 and 2003 were anti-dilutive.
Reclassifications
Certain accounts in the prior quarters' consolidated financial statements have
been reclassified for comparative purposes to conform with the presentation in
the current quarter consolidated financial statements. These reclassifications
had no effect on the net loss or stockholders' equity.
NOTE 3 - LIQUIDITY
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the nine months ended September 30, 2004 and 2003, the Company incurred net
losses of $4,819,931 and $2,733,406, respectively. At September 30, 2004, the
Company had an accumulated deficit of $39,691,763. The Company's ability to
continue as a going concern is dependent on it ultimately achieving
profitability and/or raising additional capital. Management intends to obtain
additional debt or equity capital to meet all of its existing cash obligations
and fund commitments on planned MultiBand projects however, there can be no
assurance that the sources will be available or available on terms favorable to
the Company. Management anticipates that the impact of the actions listed below,
will generate sufficient cash flows to pay current liabilities, long-term debt
and capital lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional debt or equity investment in the Company by either
issuing notes payable or preferred or common stock ( on November 12, 2004
Multiband obtained a secured debt financing of approximately $2.1 million
and on November 16, 2004 Multiband finalized a private placement of the
Company's Series H Preferred stock of approximately $1 million.)
3. Continue to market MultiBand services and acquire additional
multi-dwelling unit customers.
4. Control capital expenditures by contracting MultiBand services and
equipment through a landlord-owned equipment program.
5. Establish market for wireless internet services.
7
NOTE 4 - STOCK WARRANTS
Stock warrants activity is as follows for the nine months ended September 30,
2004.
NUMBER OF WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
---------- ----------------
Warrants outstanding - December 31, 2003
7,421,874 1.87
Granted 814,799 1.98
Canceled or expired 0 0
Exercised
(475,503) 1.52
Warrants outstanding - SEPTEMBER 30, 2004 7,761,170 1.86
The warrants granted during the nine months ended September 30, 2004 were
awarded with common stock and for services rendered.
NOTE 5 - BUSINESS SEGMENTS
Following is Company business segment information for the three months ended
September 30, 2004 and 2003:
Multiband Multiband
Business Consumer
Multiband Services Services Total
------------ ------------ ------------ ------------
Quarter ended September 30, 2004
Revenues $ 0 $ 5,203,269 $ 3,865,489 $ 9,068,758
Income (Loss) from operations (936,075) 62,682 (627,738) (1,501,131)
Identifiable assets 2,402,401 4,946,792 22,664,925 30,014,118
Depreciation and amortization 7,636 71,537 1,040,393 1,119,566
Capital expenditures 3,083 37,201 203,113 243,397
Quarter ended September 30, 2003
Revenues $ 0 $ 5,864,468 $ 418,897 $ 6,283,365
Income (Loss) from operations (370,645) 72,428 (321,474) (619,691)
Identifiable assets 4,543,772 5,601,468 2,803,524 12,948,764
Depreciation and amortization 129,950 100,173 149,862 379,985
Capital expenditures 0 41,698 6,611 48,309
Following is Company business segment information for the nine months ended
September 30, 2004 and 2003:
Multiband Multiband
Business Consumer
Multiband Services Services Total
------------ ------------ ------------ ------------
Nine months ended September 30, 2004
Revenues $ 0 $ 15,345,871 $ 7,388,723 $ 22,734,594
Loss from operations (2,068,241) (401,172) (1,392,366) (3,861,799)
Identifiable assets 2,402,401 4,946,792 22,664,925 30,014,118
Depreciation and amortization 236,882 278,405 2,042,501 2,557,788
Capital expenditures 9,773 135,842 338,195 483,810
Nine months ended September 30, 2003
Revenues $ 0 $ 16,831,531 $ 1,011,977 $ 17,843,508
Loss from operations (1,279,925) 45,997 (789,480) (2,023,408)
Identifiable assets 4,543,772 5,601,468 2,803,524 12,948,764
Depreciation and amortization 373,662 318,839 357,475 1,049,976
Capital expenditures 0 272,466 83,825 356,291
8
NOTE 6 - RELATED PARTIES
The Company had revenues from companies that are associated with a
director, who was elected to the board of directors during 2003, of
approximately $0 and $17,000 for the nine months ended September 30, 2004 and
2003, respectively. In addition, the Company had accounts receivable outstanding
from these companies of approximately $140,000 and $142,000 at September 30,
2004 and 2003, respectively.
NOTE 7- ACQUISITIONS
On July 9, 2004, Multiband (the Company) completed its acquisition, which had an
acquisition date of June 1, 2004, of the outstanding membership interests of
Rainbow Satellite Group, LLC (Rainbow), a provider of satellite television
services to multi-dwelling units, for approximately 6.9 million dollars, two
million of which was paid for in Multiband Preferred Stock, valued at $2.00 per
share on a conversion formula to Multiband common stock, one million dollars of
which was paid for in cash and the balance in promissory notes due by January
2005. These notes are secured by Rainbow Company assets and bear interest at the
prime rate. The stock value was a negotiated price between Buyer and Seller. In
the event Multiband defaults in the payment of said promissory notes, the former
owners of Rainbow have certain rights to repurchase the aforementioned
membership interests for 20% less than any sums Multiband has paid prior to the
date of default. The consideration paid was based on the Company's analysis of
likely future net incomes to be generated over a six year period by the acquired
Company. The cash was provided by funds Multiband had previously raised in a
private placement. The aforementioned purchase price is subject to adjustment
pursuant to the parties agreement if the number of Rainbow subscribers increases
or decreases as of an adjustment date. The assets were acquired from the
members/owners of Rainbow. Prior to the transaction, there was no material
relationship between the owners of sellers and the Company. With this
acquisition, the Company acquired over 16,000 video subscribers which are
primarily located in California, Colorado, Texas, Florida, Illinois and New
York. In connection with the acquisition, the Company incurred a $300,000
finder's fee.
On August 9, 2004, Multiband Corporation (the Company) completed its acquisition
of certain assets of 21st Century Satellite Communications, Inc. (21st Century)
for one million dollars, $333,333 of which was paid for in Company stock, valued
at $1.60 per share, $250,000 of which was paid for in cash and the balance in
equipment lease payments due by August 2007. The consideration paid was based on
the Company's analysis of the value of the acquired video equipment and related
video subscribers totaling approximately 5,000. The cash was provided by funds
Vicom had previously raised in a private placement. In connection with the
acquisition, the Company incurred a $125,000 finder's fee which was paid for in
Company stock , valued at $1.42 for a total of $31,250, and the remaining
$93,750 is included in accrued liabilities at September 30, 2004.
With these acquisitions, the Company has substantially increased its
subscriber base.
ALLOCATION OF PURCHASE PRICE
21St Century Rainbow
------------ ----------
Total cash/stock consideration 1,000,000 7,219,999
Add: Transaction costs 125,000 300,000
Add: Liabilities assumed 0 0
--------- ---------
Total Consideration 1,125,000 7,519,999
Less Tangible assets (416,666) (476,358)
--------- ---------
Intangible assets, net 708,334 7,043,641
========= =========
9
The following unaudited pro forma condensed results of operations for
the three and nine months ended September 30, 2004 and 2003 give effect to the
acquisition of URON, MDU, Rainbow, and 21st Century as if such transactions had
occurred on January 1, 2003.
The unaudited pro forma information does not purport to represent what
the Company's results of operations would actually have been if such
transactions in fact had occurred at such date or to project the Company's
results of future operations.
2004 2003
---------------------------- ----------------------------
CONSOLIDATED CONSOLIDATED
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
PER I/S DISCLOSED PER I/S DISCLOSED
------------ ------------ ------------ ------------
THREE MONTHS - JULY TO SEPTEMBER
Revenues $ 9,068,758 $ 9,134,591 $ 6,283,365 $ 9,297,729
Loss from operations $ (1,501,131) $ (1,501,425) $ (619,691) $ (404,990)
Net loss $ (1,851,593) $ (1,851,887) $ (832,622) $ (750,189)
Net loss per share - basic and diluted $ (.07) $ (.07) $ (.05) $ (.04)
Weighted average shares outstanding - basic and
diluted 25,480,007 25,480,007 16,981,266 16,981,266
2004 2003
---------------------------- ----------------------------
CONSOLIDATED CONSOLIDATED
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
PER I/S DISCLOSED PER I/S DISCLOSED
------------ ------------ ------------ ------------
NINE MONTHS - JANUARY TO SEPTEMBER
Revenues $ 22,734,594 $ 26,229,743 $ 17,843,508 $ 26,320,653
Loss from operations $ (3,861,799) $ (3,827,946) $ (2,023,408) $ (1,136,437)
Net loss $ (4,819,931) $ (4,821,889) $ (2,733,406) $ (2,233,074)
Net loss per share - basic and diluted $ (.21) $ (.21) $ (.19) $ (.14)
Weighted average shares outstanding - basic and
diluted 22,494,250 22,494,250 15,168,069 15,168,069
The unaudited pro forma results of operations for the three and nine months
ended September 30, 2004 and 2003 as a result of the SBC acquisition of video
subscribers and video equipment is not material to the historical financial
statements.
NOTE 8 - LEGAL PROCEEDINGS
In the third quarter of 2004, the Company was named as a defendant in
an action brought by Private Investor's Equity Group (PIEG) who is seeking
damages in excess of $75,000 over an alleged financing fee owed. The Company has
raised numerous defenses to said action including a release executed by PIEG
related to said financing fee.
10
NOTE 9 - SUBSEQUENT EVENTS
a) On November 12, 2004, Multiband Corporation finalized a secured
convertible debt financing.
The offering was funded by a group of institutional and accredited investors.
Multiband intends on utilizing the new long-term debt facility to restructure
existing short-term debt obtained through the firm's extensive acquisition
activities and for general working capital purposes.
Under the terms of the debt offering, the Company will issue junior secured
thirty-six month term convertible promissory notes in the aggregate principal
amount of approximately $2,100,000. The Company assets secure the notes via
junior lien. The convertible notes accrue interest at the rate of 6% per annum,
are payable semi-annually at the option of the Company in cash or shares of the
Company's common stock, and are convertible into shares of common stock at the
rate of $1.00 per share. The Company also is required to file a registration
statement providing for the resale of the shares issuable upon the conversion of
the notes.
b) On November 16, 2004, Multiband Corporation finalized a private
placement of the company's Series H Convertible Preferred Stock. The Series H
Preferred Stock offering was funded by a group of institutional and accredited
investors. Multiband intends on utilizing the proceeds received from the
offering to retire short-term debt and for general working capital purposes.
Under the terms of the preferred stock offering, the Company will issue shares
of its Series H Convertible Preferred Stock in the aggregate offering amount of
approximately $1,050,000. The shares of Series H Convertible Preferred Stock
accrue dividends at the rate of 6% per annum, are payable semi-annually at the
option of the Company in cash or shares of the Company's common stock, and are
convertible into shares of common stock at the rate of $1.00 per share (one
million fifty thousand shares). In addition, the investors will also receive
five-year warrants to purchase an aggregate of approximately 3,150,000 shares of
Common Stock at an exercise price of $1.25 per share. The Company also is
required to file a registration statement providing for the resale of the shares
issuable upon the conversion of the Series H Convertible Preferred Stock and
upon exercise of the warrants.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, product pricing, management for growth, integration of acquisitions,
technological developments, new products, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements including those made in this statement. In order to
comply with the terms of the Private Securities Litigation Reform Act, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or Company's
forward-looking statements.
The risks and uncertainties that may affect the operations,
performance, developments and results of the Company's business include the
following: national and regional economic conditions; pending and future
legislation affecting IT and telecommunications industries; market acceptance of
the Company's products and services; the Company's products and services; the
Company's continued ability to provide integrated communication solutions for
customers in a dynamic industry; and other competitive factors.
Because these and other factors could affect the Company's operating
results, past financial performance should not necessarily be considered as a
reliable indicator of future performance and anticipated future period results.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Multiband Corporation (formerly named Vicom, Inc.) is a Minnesota
corporation formed in September 1975. Multiband has two operating divisions: 1)
Multiband Business Services (MBS, legally known as Corporate Technologies, USA,
Inc dba Multiband), and Multiband Consumer Services (MCS), which encompasses the
subsidiary corporations, Multiband USA, Inc., URON, Inc., Minnesota Digital
Universe, Inc., and Rainbow Satellite Group, LLC.
Multiband completed an initial public offering in June 1984. In
November 1992, Multiband became a non-reporting company under the Securities
Exchange Act of 1934. In July 2000, Multiband regained its reporting company
status. In December, 2000, Multiband stock began trading on the NASDAQ stock
exchange under the symbol VICM. In July, 2004, concurrent with the name change
to Multiband Corporation, the Company's NASDAQ symbol changed to MBND.
Multiband's website is located at: www.multibandusa.com.
As of September 30, 2004, MBS was providing telephone equipment and
service to approximately 600 customers, with approximately 10,000 telephones in
service. In addition, MBS provided computer products and services to
approximately 1,800 customers. Telecommunications systems distributed by MBS are
intended to provide users with flexible, cost-effective alternatives as compared
to systems available from major telephone companies, including those formerly
comprising the Bell System and from other interconnect telephone companies.
MBS provides a full range of voice, data and video communications
systems and service, system integrations, training and related communication
sales and support activities for commercial, professional and institutional
customers, most of which are located in Minnesota and North Dakota. MBS
purchases products and equipment from NEC America, Inc. (NEC), Cisco Systems,
Inc. (Cisco), Nortel Networks Corp (Nortel), Tadiran Telecommunications, Inc.
(Tadiran), and other manufacturers of communications and electronic products and
equipment. MBS uses these products to design telecommunications and computer
systems to fit its customers' specific needs and demands.
MCS provides satellite television, local and long distance services and
internet services to residents of multi-dwelling units (MDUs), such as apartment
buildings and time share resorts. The Company obtains access agreements with the
owners of MDU properties permitting us the rights to provide the aforementioned
services.
At September 30, 2004, MCS had 32,336 subscribers using its services
(3,299 using voice services, 25,357 using video services and 3,680 using
internet services).
12
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A PERCENTAGE OF DOLLAR AMOUNTS AS A
REVENUES PERCENTAE OF REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- -----------------------------------------
September 30,
2004 September 30, 2003 September 30, 2004 September 30, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
------------------ -------------------- --------------------- -------------------
REVENUES 100% 100% 100.% 100%
COST OF PRODUCTS & SERVICES 63.9% 71.5% 68.5% 71.3%
GROSS MARGIN 36.1% 28.5% 31.5% 28.7%
SELLING, GENERAL & ADMINISTRATIVE
INCLUDING DEPRECIATION AND
AMORTIZATION 46.8% 38.4% 46.1% 40.0%
OPERATING LOSS -16.6% -9.9% -17.0% -11.3%
INTEREST EXPENSE & OTHER, NET -3.9% -3.4% -423% -4.0%
LOSS BEFORE TAXES -20.4% -13.3% -21.2% -15.3%
INCOME TAX 0 0 0 0
NET LOSS -20.4% -13.3% -21.2% -15.3%
The following table sets forth, for the period indicated, the gross margin
percentages for Corporate Technologies USA, Inc. and MultiBand, Inc.
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- -----------------------------------------
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------- -------------------- --------------------- -------------------
GROSS MARGIN PERCENTAGES:
MBS 25.3% 27.4% 24.2% 28.0%
MCS 50.3% 43.1% 46.1% 41.3%
RESULTS OF OPERATIONS
Revenues
Revenues increased 44.3% to $9,068,758 in the quarter ended September
30, 2004, as compared to $6,283,365 for the quarter ended September 30, 2003.
Revenues for MBS decreased 11.2% in the third quarter of fiscal 2004 to
$5,203,269 as compared to $5,864,468 in the third quarter of fiscal 2003
primarily as a result of reduced spending by a few larger MBS customers. The
Company is diversifying its customer base to add medium and small businesses and
as a result the Company hopes revenues will stabilize in future quarters.
Revenues for MCS increased 822.8% to $3,865,489 as compared to $418,897
in the third quarter of fiscal 2003. This increase is due to expansion of MCS as
a result of the acquisitions of MDU, Rainbow and 21st Century.
Revenues for the nine month period ended September 30, 2004 increased
27.4% to $22,734,594 from $17,843,508 for the same period in 2003, due to the
aforementioned increase in MCS revenues obtained as a result of the acquisitions
noted above.
13
Gross Margin
The Company's gross margin increased 82.8% or $1,483,195 to $3,272,731
for the quarter ended September 30, 2004 as compared to $1,789,536 for the
similar quarter last year. For the quarter ended September30, 2004, as a percent
of total revenues, gross margin was 36.0% as compared to 28.5% for the similar
period last year.
Gross margin for MBS decreased by 18.1% to $1,318,270 for the quarter
ended September 30, 2004, as compared to $1,608,975 in the third quarter of
fiscal 2003 due to lower MBS sales and lower profits on those sales.
Gross margin for MCS for the quarter ended September 30, 2004 increased
977.2% to $1,945,065 as compared to $180,561 in the second quarter of fiscal
2003 reflecting on the increase of revenue being billed.
For the nine month period ended September 30, 2004, as a percent of
total revenues, gross margin was 31.5% as compared to 28.7% for the same period
in 2003. For the remainder of fiscal year 2004, gross margin percentages are
expected to remain constant as the Company continues to enhance recurring
subscriber revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses including depreciation and
amortization increased 76.2% to $4,245,983 in the quarter ended September 30,
2004, compared to $2,409,227 in the prior year quarter. This increase is
primarily a result of increased operating and amortization expenses related to
the purchase and addition of new MDU property assets in the MCS division.
Selling, general and administrative expenses were, as a percentage of revenues,
46.8% for the quarter ended September 30, 2004 and 38.4.1% for the similar
period a year ago.
For the nine month period ended September 30, 2004 these expenses
increased 46.1% to $10,488,032 as compared to $7,147,965 for the nine months
ended September 30, 2003. As a percentage of revenues, selling, general and
administrative expenses are 46.1% for the period ended September 30, 2004 as
compared to 40.0% for the same period 2003.
Interest Expense
Interest expense was $347,647 for the quarter ended September 30, 2004,
versus $202,958 for the similar period a year ago, reflecting an increase in the
Company's long term debt as a result of financing the acquisitions noted above.
Amortization of original issue discount was $171,773 and $85,364 for the three
months ended September 30, 2004 and 2003, respectively.
Interest expense was $949,129 for the nine months ended September 30,
2004 and $648,368 for the same period last year. For the nine months ended
September 30, 2004 amortization of original issue discount was $483,787 and
$285,345 in the same period last year, respectively.
Net Loss
In the third quarter of fiscal 2004, the Company incurred a net loss of
$1,851,593 compared to a net loss of $832,622 for the third fiscal quarter of
2003. This includes a goodwill impairment charge of $527,879 and amortization
primarily related to identifiable intangible assets obtained in acquisitions of
$754,971.
For the nine months ended September 30, 2004, the Company recorded a
net loss of $4,819,931 as compared to $2,733,406 for the nine months ended
September 30, 2003.
Liquidity and Capital Resources
Available working capital, at September 30, 2004 decreased
significantly over the similar period last year primarily due to short term
notes payable issued during the third quarter and in the course of the second
quarter acquisitions.
14
The Company continues to face a very competitive environment in its MBS
division which in the second quarter of 2004 produced both declining revenues
and margins versus the same period a year ago. The Company's MCS division
continues to experience significant growth, primarily due to increased
subscriber related recurring revenues acquired via various transactions
previously mentioned herein.
The Company, between September 30, 2004 and January 1, 2005, is
obligated to pay approximately $5.8 million to retire the notes payable related
to its MDU Inc. and Rainbow acquisitions. The Company as of September 30, 2004
did not have available cash on hand sufficient to retire said notes payable.
Nonetheless, management of Multiband believes that, for the near future, cash
generated by sales of stock, and existing credit facilities, in aggregate, are
adequate to meet the anticipated liquidity and capital resource requirements of
its business. The Company also believes, although it cannot guarantee, that it
will continue to be able to raise money for the purposes of financing
acquisitions. During the nine months ended September 30, 2004, the Company
raised approximately $3.2 million via sales of its common stock to accredited
investors primarily for such purposes. In addition, for the quarter ended
September 30, 2004, the Company achieved positive earnings before interest,
taxes, depreciation, amortization and a non cash goodwill impairment charge
("EBITDA") of $146,314.
The Company, as is common in the cable and telecommunications
industries, uses EBITDA as a measure of performance to demonstrate earnings
exclusive of interest and non cash events. EBITDA is not, and should not be
considered, an alternative to net income, income from operations, or any other
measure for determining operating performance or liquidity, as determined under
accounting principles generally accepted in the United States. The most directly
comparable GAAP reference in the Company's case is the removal of interest,
depreciation, amortization and other non cash charges. The following table
reconciles Company EBITDA to our consolidated net loss as computed under GAAP.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
EBITDA $ 146,314 $ (239,706) $ (504,564) $(1,035,062)
Interest Expense, other (350,462) (212,931) (958,132) (648,368)
Depreciation and Amortization (1,119,566) (379,985) (2,557,788) (1,049,976)
Goodwill Impairment (527,879) 0 (527,879) 0
Other Non Cash Expense
associated with Common stock
issuance 0 0 (271,568) 0
----------- ----------- ----------- -----------
Net Loss $(1,851,593) $ (832,622) $(4,819,931) $(2,733,406)
=========== =========== =========== ===========
Capital Expenditures
The Company used $483,810 for capital expenditures during the nine
months ended September 30, 2004, as compared to $356,291 in the similar period
last year. Capital expenditures consisted of equipment acquired for internal
use. The Company anticipates future capital purchases will remain consistent
with current year expenditures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvements. The estimated fair value of these assets is dependent on the
Company's future performance. In assessing for potential impairment for these
assets, the Company considers future performance. If these forecasts are not
met, the Company may have to record an impairment charge not previously
recognized, which may be material. During the three and nine months ended
September 30, 2004 and 2003, the Company did not record impairment losses
related to long-lived assets.
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations. During the three and nine
months ended September 30, 2004 and 2003, the Company recorded impairment losses
related to goodwill of $527,879 and $0, respectively.
15
Inventories
We value our inventory at the lower of the actual cost or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand characterize our industry.
ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
Multiband is subject to interest rate variations related to its notes
payable with Rainbow and Laurus Master Fund Ltd., both of which have interest
tied to the prime lending rate.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer, and its President and Chief Financial Officer, of the
effectiveness of the Company's "disclosure controls and procedures" as of the
end of the period covered by this report, pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act. Based upon that evaluation, the Company's
Chief Executive Officer and its President and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic SEC filings. However, due to the limited number of
Company employees engaged in the authorization, recording, processing and
reporting of transactions, there is inherently a lack of segregation of duties.
The Company periodically assesses the cost versus benefit of adding the
resources that would remedy or mitigate this situation and currently, does not
consider the benefits to outweigh the costs of adding additional staff in light
of the limited number of transactions related to the Company's operations.
Internal Control Over Financial Reporting
There have been no significant changes in internal control over
financial reporting that occurred during the fiscal quarter covered by this
report that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
business including, in the third quarter of 2004, the Company was named as a
defendant in an action brought by Private Investor's Equity Group (PIEG) who is
seeking damages in excess of $75,000 over an alleged financing fee owed. The
Company has raised numerous defenses to said action including a release executed
by PIEG related to said financing fee.
ITEM 2. ISSUANCE OF COMMON STOCK
The Company, during the third quarter, issued 106,832 common shares to
various accredited investors for net proceeds of approximately $106,250 mainly
due to a pre-existing preferred stock conversion right. The securities were
offered and sold by the Company in reliance upon the exemptions provided under
Section 4(2) of the Securities Act relating to sales not involving any public
offering, and/or Rule 506 of Regulation D under the Securities Act.
In the third quarter of 2004, the Company issued common stock in
connection with the acquisitions as itemized in Note 7 in the condensed
footnotes herein.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(s) Certification of Chief Executive Officer
- James Mandel
31.2 Rule 13a-14(s) Certification of Chief Financial Officer
- Steven Bell
32.1 Section 1350 of Sarbanes-Oxley Act of 2002 - James
Mandel and Steven Bell
(b) Reports on Form 8-K.
Filed July 9, 2004
Filed August 6, 2004
Filed August 20, 2004
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MULTIBAND CORPORATION
Registrant
Date: November 19, 2004 By: /s/ James L. Mandel
-----------------------------------
Chief Executive Officer
Date: November 19, 2004 By: /s/ Steven M. Bell
-----------------------------------
Chief Executive Officer
(Principal Financial and Accounting
Officer)
18